Economy Needs Main Street to Invest

On July 15 Gretchen Morgenson of the New York Times reported that some large brokerages are providing major hedge funds with an early peek of their research analysts’ earnings revisions via a survey. Given that changes in analysts’ estimates can cause significant short-term movements to stocks, if the allegations are true these hedge funds have an opportunity to act before this information is made public.

An editorial in the same paper on July 17 argues that “trading by big investors ahead of recommendations from analysts would be another example of the uneven playing field that markets have become — and another reason for ordinary investors to shun equities.” The editorial rightly goes on to say that the absence of individual investors would create “a less robust market, a less robust economy and a less wealthy society, as individuals are unable to mass the sums needed for retirement.”

Any uneven playing field without a doubt needs to be addressed. How this is best achieved is a difficult problem to solve, as government regulations tend to miss the mark, however well-intentioned they are. History has shown that some people will work much harder to cheat the system for only slightly more benefit than they would receive by making an honest buck. Indeed, this isn’t the first time the playing field hasn’t been level — that’s why Reg­ulation FD, which promotes full and fair disclosure by publicly traded companies, was adopted by the Securities and Exchange Commission in 2000.

But the overarching message in the meantime shouldn’t be that the game is rigged. It must be that individuals shouldn’t be leaving the stock market. Despite the occasional Wall Street scandal, over the decades countless numbers of investors who focus on growing, high-quality companies whose stocks are selling at reasonable prices, have a long-term perspective, practice regular investing and diversify their holdings have been able to thrive.

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